SEC and Galleon defendants tussle over wiretaps

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is demanding that Galleon hedge fund founder Raj Rajaratnam and others accused of insider trading hand over recordings of wiretap evidence, but the defendants have refused to give them up.

In a flurry of letters made public on Monday in the high-profile Manhattan federal court case involving employees of some of America's best-known companies, Rajaratnam and his co-accused argue that the recorded conversations belong only in a parallel criminal investigation.

U.S. District Court Judge Jed Rakoff also heard oral arguments on the wiretap issue on Monday, but he reserved publishing any ruling until next week.

Separately, Rakoff ruled from the bench that the SEC may file an amended complaint to add new civil charges against Rajaratnam. The request stemmed from a guilty plea on criminal charges by former McKinsey & Co management consultants director Anil Kumar on January 7 in which he said Rajaratnam paid him $1.75 million (1.08 million pounds) in exchange for tips on McKinsey clients.

Rajaratnam, 52, is the most prominent defendant among 21 people criminally or civilly charged last October and November in what federal prosecutors described as the biggest hedge fund insider trading case in the United States. The accused include employees of International Business Machines Corp (IBM.N), McKinsey & Co executive management consultants and Intel Capital, an arm of Intel Corp (INTC.O).

Rajaratnam's lawyers Terence Lynam and John Dowd wrote in a letter to Rakoff that the law "denies the SEC any authority to obtain or use wiretaps as part of its civil enforcement efforts because the SEC is not a law enforcement agency empowered by law to conduct investigations or to make arrests, which is why the United States Attorney's Office has not simply released the wiretaps to the SEC."

The office of the Manhattan U.S. Attorney, in its own letter to the judge, asked him to compel the defendants to produce wiretap recordings in their possession to the SEC for its case. Prosecutors allowed the defendants access to the recorded conversations so their counsel could refer to them as part of their defense.

While the SEC and federal prosecutors often coordinate with each other, there are limits on the information they can share. Rajaratnam's lawyers have argued that the wiretaps were obtained unlawfully and violated his constitutional rights.

Lynam told the judge in court that there were 14,000 intercepts of phone conversations, some of them private conversations between Rajaratnam and his family. The conversations in which he and others are alleged to have discussed inside information and illegally traded in tech industry stocks date from 2004 to last year.

The cases are SEC v Galleon Management LP, U.S. District Court for the Southern District of New York No. 09-08811 and USA v Raj Rajaratnam et al, No. 09-01184.

Also on Monday, the SEC agreed to settle its lawsuit against two defendants in the Galleon probe.

Defendants Ali Far and Richard Choo-Beng Lee, founder and former president of California hedge fund Spherix Capital LLC, agreed to pay a combined $2.1 million to settle the SEC's civil complaint, the commission said in a court filing.

(Reporting by Grant McCool and Jonathan Stempel; Editing by Matthew Lewis, Phil Berlowitz)